How Commercial Tenants Can Save Their Lease Post Covid-19

• Publication year: 2020
• Author: By Ajay Gupta

How Commercial Tenants Can Save Their Lease Post COVID-19

By Ajay Gupta

A Michigan native, Ajay Gupta came to San Diego in 2002. He lives in La Jolla with his beautiful wife, two boys, and cat. Mr. Gupta has been recognized by SuperLawyers from 2015 through 2018, and is one of 13 certified bankruptcy specialists in San Diego County and widely regarded as an authority in the area of real estate and corporate law. Learn more about Ajay at www.socal.law.

In April of 2020, in response to California's COVID-19 state-of-emergency declaration, Governor Gavin Newsom and the California Judicial Council ordered that landlords cannot initiate an unlawful detainer action until 90 days after Governor Newsom lifts the State of Emergency Declaration. These governmental actions have certainly provided some welcomed breathing room for tenants that have felt the immediate economic impacts of COVID-19.

However, it is uncertain how much longer these orders will stay in place. As Governor Newsom recently announced, Californians have "arguably" flattened the curve,¹ and we are in phase two of the State's four-phase reopening plan. Given new developments throughout the state of California, commercial and residential tenants alike need to start questioning how they will protect their tenancy once the government lifts these tenant-friendly orders.

If commercial and residential tenants envision themselves on the losing side of an unlawful detainer action in the foreseeable future, they should look towards sections 1179 and 3275 of the California Civil Code. Both statutes provide the court with broad authority to grant the tenant with "relief from forfeiture" of the lease agreement and reinstate the tenant to its former tenancy—even after the court has terminated the lease and issued a judgment in favor of the plaintiff-landlord. Indeed, tenants use both statutes as a "last hope" to save their tenancy. This article will discuss both statues in-depth and how tenants can utilize these statues in state and bankruptcy courts in a post COVID-19 world.

WHAT DOES "FORFEITURE" MEAN & WHEN IS A LEASE FORFEITED?

The term "forfeiture" simply means that the lease agreement is terminated and the tenant has no further rights, obligations, or privileges under the contract. If the lease is "forfeited," the tenant loses the benefits it expected to receive under the lease agreement, such as options to renew or extend its tenancy or its security deposit. A tenant forfeits a lease agreement in two ways.

First, the landlord declares a forfeiture of the lease agreement when the following four requirements have been satisfied:

1. The tenant breached the lease;
2. The landlord properly served the tenant with a notice to cure the breach within a reasonable time (i.e., a three-day notice to pay or quit);
3. The notice contains a provision that allows the landlord to declare a forfeiture of the lease if the tenant does not cure the breach; and
4. The tenant failed to cure the breach within the time permitted.²

Second, the lease agreement contains a clause that allows the landlord to declare a forfeiture if the other party breaches a covenant or condition of the contract. The landlord must show that the tenant's breach was a "material breach" that affected the landlord. An unharmful or de minimis violation will not suffice.

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For example, in Boston, LLC v. Juarez, the landlord was permitted to declare a forfeiture of the lease if the tenant violated any portion of the lease agreement. The court held that the tenant's failure to obtain renter's insurance, as required under the lease, did not amount to a "material breach" of the agreement. The court found that the condition to obtain renter's insurance benefited the tenant, and its breach of this provision did not harm or impair the landlord's rights under the lease agreement. As such, the landlord was estopped from declaring a forfeiture.³

A more common material breach is sub-leasing the property when the lease forbids sub-leasing or failing to pay rent. It is essential for tenants, primarily commercial tenants and landlords, to review their lease agreement to determine whether the contract contains a forfeiture clause.

SECTION 1179 OF THE CALIFORNIA CIVIL CODE

Section 1179 allows the court to grant "relief from forfeiture" if the tenant: (1) pays all past rent owed or cures its breach of the lease covenants; and (2) convinces the court that it will suffer a "hardship" if it is not restored to its prior tenancy.⁴ Commercial and residential tenants often struggle to satisfy the second requirement, as courts find "hardship" in rare circumstances.

To determine whether granting relief is fair to both parties, courts engage in a three-factor test. The three factors are: (1) the nature and character of the tenant's breach; (2) hardship of the parties if relief from forfeiture is/is not granted, and (3) whether the parties have acted in good and/or bad faith towards each other.⁵ The three-factor test is certainly an extra hurdle that tenants must overcome when seeking relief. Nevertheless, courts have continuously granted relief from forfeiture when the...